Equity fund inflows have hit record levels this year – where are investors putting their money?

UK investors are putting record amounts of money into equity funds amid increased hopes of an interest rate cut and a boost to the stock market in the coming months.

Investors appear to have fallen back in love with stocks as falling inflation has increased the likelihood of the Bank of England cutting interest rates, boosting confidence in equities.

The latest Fund Flow Index from investment software provider Calastone revealed a record first half of 2024 for money going into equity funds, at £11.39bn.

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Five of the best 15 months of the index have been recorded this year, including in June 2024 when investors put £1.72bn into equity funds holdings.

It comes as increasing numbers of economies have started cutting interest rates, including the European Central Bank (ECB) raising hopes that others such as the Bank of England and the US Federal Reserve will follow suit.

“All eyes are trained on the world’s central banks, looking for signals that long-awaited rate cuts from the Fed and the Bank of England will follow those like the ECB, Swiss National Bank and the Bank of Canada which have already begun to bring the price of money down,” says Edward Glyn, head of global markets at Calastone.

“Hopes for cheaper money after the painful rate squeeze of the last two-and-a-half years are the clear driver of record flows into equity funds so far this year.”

Where are equity investors putting their money?

The main driver of equity fund inflows for much of this year has been North America, boosted by the popularity of technology stocks such as the Magnificent 7.

North American and global funds attracted £7.8bn and £7.58bn respectively in the first six months of 2024, Calastone said.

But interest in US equities waned in June after a £179m outflow of cash from US environmental, social and governance (ESG)-focused funds compared with £5.1bn that was put in between January and May 2024.

Meanwhile, despite the FTSE 100 reaching record highs in May, there was a £3.75bn outflow from UK-focused funds as the British-based stocks continue to lag other regions.

Investors also withdrew capital from bond funds for the second month in a row, pulling £471m  from their holdings in June, and taking the two-month total to £1.11bn, according to Calastone.

Money was also taken out of property funds, with £48m of outflows, while £247m was invested in money market funds.

Will UK stock sentiment recover?

Calastone highlights that UK fund outflows slowed in May and June and many analysts have highlighted that London Stock Exchange-listed companies are looking cheaper than US rivals.

To borrow Labour's 1997 general election campaign song, there are signs that things can only get better for UK equities.

Michael Brown, chief investment officer at Martin Currie, highlights that real wage growth and employment data in the UK have both beaten analyst expectations while the country's manufacturing and services purchasing managers indices have all turned positive unlike its European neighbours.

“The international perception of the UK is changing,” says Brown.

“A change of government, to one more moderate and international in tone, coupled with a deterioration of the European political stability, notably in France, indicates that there remains room for sterling to appreciate. This would be beneficial for lowering inflation rates even further.”

He suggests that sterling could be boosted by the Bank of England taking its time on rate cuts.

“At the same time, a reduction in the risk premium for UK assets could accelerate sterling’s move and positively surprise the equity market,” he adds.